Dave Smith on the End of Political Pretense
Regardless of your opinions on the Mises Institute, the Mises Caucus, or even Libertarianism, this podcast episode is worth a listen.
The Benefits of Gold-Pegged Stablecoins?
Most of the white papers of the existing gold-tied stablecoins exalt the perks of digital currency backed by the world’s most enduring monetary commodity. Many claim the benefits of 1:1 token to gold-backing, low transaction fees, a safe-haven hedge against instability and inflation, low buy-in requirements, low transactional costs for people living in remote areas, and the positive aspects of combing blockchain technology (convenience, decentralization, and honest record keeping) with the enduring value proposition of gold. While all these qualities are maybe enticing, the best way to demonstrate the superiority of golden stablecoins would be to compare them to other similar alternatives.
Standard Cryptocurrency vs. The Midas of Digital Money
The most notable difference between Bitcoin and a stablecoin like Tether Gold would be the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and internationally fluid payment system conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.
Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence.
Gold-Backed Stablecoins and Gold ETF Funds
Gold Stablecoins are frequently compared to Gold ETF Funds which are the darling of derivatives markets. Despite the criticisms of experts, there are some advantages that gilded Stablecoins hold over ETFs. Gold ETFs are essentially investment funds possessing gold-related assets. One key attribute distinguishing ETFs from their blockchain-based cousins is the fact that “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..”. In terms of liquidity, this may be a bit more simplified than cashing out a share of a gold-backed stablecoin token, as most stablecoins redeem in gold specie. However, if the point is to obtain money of “high intrinsic” value, the ETFs have to trade easy liquid for lesser money (fiat currency), in return. It would be dishonest not to bring up that gold-tied stablecoins do have counterparty risks, but that is a chance anyone takes with any third party holding precious commodities in their care.
ETFs are purely intended to function as a speculative asset, while in contrast, the smooth settlement and distributed ledger and nationally agnostic nature of blockchain structure make tokens like Pax Gold or Tether Gold better suited for use as a medium of exchange. In all honesty, this will probably best bet for re-establishing a gold standard in the post-Bretton Woods era. The political interests of Federal Reserve officials, banks, and politicians are too embedded in the empty promises of easy money policies of the post-2008 U.S. Monetary regime. The temptation lurks for utilizing Quantitative Easing, bent beyond purely macroeconomic objectives (full employment, price stability), to fund the ends of fiscal policy. (Fiscal QE). The temptation of gesturing such a powerful bargaining chip such as open purse strings would make the idea of a fixed money supply more of an obstacle than a virtue. The number of people who stand to benefit from the current monetary policy of using collateralized debt as money makes a gold standard wide-eyed opium dream. Any transition to gold-backed currency; must come from a private currency; no government would ever revert to such a barbarous relic. It doesn’t matter even if the “End the Fed” crowd gets Ron Paul or Dave Smith in the Whitehouse, a meat grinder of the political process will drown out any monetary reforms.
The Benefits Over Physical Gold
Beyond the benefits of tokenized gold lending itself as a medium of exchange from blockchain technology, it is worth noting that most transactions are now digital. The ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold.
The libertarian party is arguably the most disorganized political party in the United States.
For years, debates have waged over the gulf between the actual political philosophy and the official party’s platform. Many hardcore libertarians feel the party has long since lost its way. For many disillusioned lovers of liberty; the remedy came in the form of the Mises Caucus founded in 2017. The emergence of this faction within the LP has been met with controversy. As more members of the caucus assume leadership roles within the national party, concerns arise regarding the tendinous social views of this strain of libertarianism. Accusations of racism and transphobia have surfaced and put the Mises Caucus in the crosshairs of LP party leadership.
To the casual observer, this tension in the LP may seem like a new development; but the political in-fighting has been a fixture of the party’s institutional dynamics since its inception in the 1970s. The antipathy sowed between the libertarian establishment and Austro-libertarianism dates back to the founding of the Cato Institute. The intellectual father of the political movement sweeping the structure of the LP was none other than economist Murray Rothbard. Rothbard co-founded the institute with the vision of it being an academic nexus between libertarian thought and Austrian economics. Rothbard’s unwillingness to compromise on Cato’s messaging, he was ousted from the institute. He then moved on to establish the Mises Institute in the early 1980s. It is reasonable to this one event as a manifestation of a major schism within libertarianism. A rivalry formed between the moderate libertarian political philosophy and the convictions of full-on anarcho-capitalism. A system of beliefs exalting ideological purity, articulating rhetoric steeped in social conservatism and the mechanism of Austrian economics.
The competing philosophies of Cato and the Mises Institute are the lines between academic establishment and the populist tendencies of the liberty movement. Cato has the ear of the academy, while the Mises orbit has the ear of the people. However, this is not to say there isn’t a deep tradition of scholarly work within the Austro-libertarian tradition; the cadre of academics advancing this political philosophy has to produce voluminous amounts of literature. Cato has not had the same effect on the advancement of libertarianism on the ground level. Aside from the popularity of Rothbard’s polemical pamphlets in the 1970s and 1980s; the movement gained new life in the 2000s with the Presidential campaign of Ron Paul. The Cato Institute attempted to distance itself from Ron Paul for his reluctance to condemn political extremism. Former Senator Paul was an instrumental figure in founding the Mises Institute. He has also had longstanding professional relationships with figures such as Lew Rockwell and Rothbard.
The variety of libertarianism with a hint of social conservatism advocated for by Ron Paul and the Mises Institute cannot disavow extremism as it is part of their political strategy. In contrast to the libertarian establishment, Austro-libertarians have formed alliances with paleo-conservatives, injecting planks of Old Right sensibilities into their platform. Libertarians favoring this hard-right strategy perceive the virtues of multiculturalism and cosmopolitanism to be treasonous to individual liberty. Many Rothbardians/Hoppeans believe that policies such as open immigration will erode cultural identity, and private property rights and expand the welfare state.
This is not to insinuate that the Mises Institute nor Ron Paul’s campaign was managed by Klansmen. That would be a bad faith assessment of the political dynamics of Austro-libertarianism, there is not enough evidence to make such a claim. The attempts to annex populous conservatives and the far-right were more pragmatism on Rothbard’s part. The run-of-the-mill country club Reaganite Republican will not have any appetite to “end the fed”; naturally this individual would be a lackluster bedfellow in such an endeavor. On the other hand, a gentleman living in the rural south, raised in an environment of culturally entrenched conservatism and a distaste for centralization, would be a more likely partner in crime.
Rothbard could foresee the logical instability in the Reaganite brand of “fusionism”. The political progeny of National Review editor Frank Meyer; a doctrine suggesting that libertarians and conservatives should make minor compromises and join forces to gain more ground in American politics. Realistically, this approach is shortsighted in a climate of winner-take-all politics. Disagreements on core wedge issues will eventually create fault lines that cannot be repaired. Rothbard’s vision of liberty was immoderate and immune from the debasing effects of implicit logrolling.
The strife between the two warring factions of libertarianism is nothing short of a textbook example of a prisoner’s dilemma. Frank Meyer was not off base with such a suggestion of political compromise, but neither party agrees to make any concessions. The very stance of the Mises Caucus and other Austro-libertarian organizations is nothing more than an automatic defection. Their hard-nosed commitment to ideological integrity has already taken the possibility of bargaining off the table. Developing a libertarian with the rigidity of Aristotle’s ethical virtue of “right reason”; which is utterly inflexible. The libertarian insiders in the Washington D.C. belt away may garner more appeal to establishments and academics outside of the movement; due to their ideological moderation. These movers and shakers at the think tanks have made no effort to reach out to the populous wing of the libertarian party. If anything, they have either ignored or condemned Ron Paul supporters as hopeless racists or conspiracy-mongering dingbats. None of this is productive when it comes to advancing a political philosophy. It is as much of defection as the resolute principles of the droves of lay libertarians regularly reading the Mises Wire.
The suboptimal results engendered by this mutual defection should be conspicuous; we have yet to have had a true Libertarian in the oval office since the establishment of the official party. The overall lack of consensus has stymied libertarianism’s influence on American politics. There are always several groups arguing over what libertarianism truly is; instead of working together to make an impact. This gives outsiders the impression that libertarians are politically disorganized. It is not that they are a bunch of lazy hippies, bearded mountain men, or a gaggle of goofy naked men kvetching about drivers’ licenses. The party has been sidetracked by years of internal conflict, making this turmoil the ultimate collective action problem.
2. This is not a defense of the Mises Caucus nor a jab at the libertarian establishment. Rather, it is an expression of how neither subset of the LP is willing to compromise with the other.
August 2021 marks the fiftieth anniversary of the Nixon administration ending the Bretton Woods Agreement. The conferenced strived to establish a stable global monetary regime in the post-World War II era. Through centering fixed exchange rates around a gold-backed U.S. Dollar. The U.S. permanently closed the gold window in 1971. A gold standard made the money supply inflexible, thus making it impossible to fund the Vietnam War and other government initiatives. Instead of tightening spending when faced with a lack of gold reserves. Nixon declared us all Keynesians, forever divorcing the U.S. dollar from gold for good.
The Bretton Woods Agreement was not flawed. A clear departure from the classical gold standard (1834-1933) in America; it was still better than a pure fiat standard. The fixed supply of gold in the vaults provides hardline constraints on inflation and government spending, a lesson learned by cryptocurrency creators. Limiting the amount of money produced helps it retain its value. Helping us refrain from reducing our currency to being a worthless piece of “Monopoly money” (think Weimar Germany). Some argue that the threat of hyperinflation in the United States is hyperbole; it is crucial to remember how much the dollar has depreciated since eliminating the fixed-gold standard. Since 1971, the dollar has suffered from a rate of cumulative inflation of 570.90%! Now might be the ideal time to start arguing for a return to the gold standard. This argument is not merely a knee-jerk reaction to the 2008 financial crisis.
August 15th marks the fiftieth anniversary of the end of the Bretton Woods agreement. An economic treaty was forged in July 1944 with delegates from forty-four countries converging upon Bretton Woods, New Hampshire. Effectively establishing a global monetary regime where the U.S. Dollar was the reserve currency and was backed by gold. However, this was not the same gold standard that existed in the classical gold period ending in 1933 (p.1). A quasi-gold standard where government institutions (central banks) held the price of gold at a fixed amount (p.17). In the efforts of creating a “.. fixed currency exchange rate system..”. Even after this thin attempt to revive the gold standard imploded on itself, its vestiges still exist today. Banking institutes such as the IMF and the World Bank were established to manage this fixed exchange rate system.
In August of 1971, President Richard Nixon forever severed the U.S. Dollar from Gold. By abolishing the Bretton Woods system. Terminating gold convertibility of the dollar. Essentially setting the stage for the modern global monetary landscape; a 100 % fiat currency standard. The Nixon administration panicked by the lack of gold reserves to cover various rounds of foreign aid and wartime spending decided to terminate the agreement. Succinctly expressing this coercive declaration in the infamous proclamation “.. We are all Keynesians now..”. Officially signaling the formal death of the gold standard. Even though some commentators and economists view the end of Bretton Woods as more figurative than literal death as it truly died at the end of the classical period of the American gold standard.
It can be stated that the dollar significantly depreciated in its purchasing power since the end of Bretton Woods. The dollar experienced an approximate cumulative rate of inflation of 570.9% since 1971. One U.S. dollar in 2021 is equal to $6.71 dollars in 1971! These numbers are unquestionably jarring. It is easy to see why there has been a renewed interest in re-establishing a gold standard since the 2008 market crash. An initiative that has led to a modern renaissance for Austrian Economics. Also, has lent itself to supporting the activism of the Tea Party movement and the political career of Ron Paul. Despite the spirited rallying of the pro-gold camp, the Federal Reserve still exists. Our currency is still nothing more than monopoly money. That only continues to plummet in value. There are many defenders of a fiat currency standard within the political establishment. Ranging from journalists to the wonkish economists and experts exalting the virtues of stable money and currency liquidity. Much like another policy prescription, there are always silent beneficiaries lurking around the corner.
The Bootleggers and Baptists of Fiat Currency
The Public Choice economist Bruce Yandle provided us with the perfect framework for analyzing the odd couple coalitions of modern monetary policy. That is the powerful lens of the Bootleggers and Baptists paradigm. One-half of the coalition acts as the moralizing agent, providing a normative defense of the policy position. In contrast, the Bootleggers quietly reap the benefits of the policy’s consequences. In terms of maintaining the status quo of fiat currency, the Bootleggers and Baptists should be quite obvious. The Baptists are clearly the commentators, academics, journalists, etc. stressing the benefits of fiat currency. Conversely, emphasizing the dangers of a gold standard. Some of our fiat currency Baptists include several luminaries in the fields of journalism and economics. Including Ezra Klein (former Washington Post editor and co-founder of Vox) and Tyler Cowen (chairman and faculty director of the Mercatus Center) (p.2 & 6) . Both gentlemen are far from the only detractors when it comes to re-establishing a gold standard for currency. However, they are respected and high-profile dissenters. Carefully pointing out some of the potential hazards of implementing a gold standard. Arguments including price stability, liquidity issues, deflation, and rigidity in the money supply to just name a few concerns (p.3-20). All these concerns (regardless of their veracity) could be classified as normative concerns, despite these arguments being functional in nature. Through adopting a monetary policy that would be detrimental to the economy, it would be placing the livelihoods of people globally in jeopardy. This concern for the wellbeing of others could be categorized as an ethical concern, making both individuals and their like-minded cohorts Baptists.
The Bootleggers would clearly be the federal government and all adjoining agencies. If you remember early, I mentioned that the main reason for ending the Bretton Woods agreement was that a gold standard was too rigid. Effectively placing a firm constraint (at least in theory) on government spending. By its very nature, a gold standard is quantitively tighter than a fiat system because you can only print redemption notes corresponding with the number of gold reserves on hand. While not ideal, even a fractional reserve gold standard would operate as a better limitation  than a pure fiat currency. Not having flexibility in the money supply keeps government spending in line, preventing the implementation (or expansion) of federal entitlement programs and unnecessary military conflicts. Through lifting this hardline limitation, the federal government is no ability to have ability to spend more money. This means more jobs/ job security for bureaucrats. This also means greater opportunities for various pork-barrel pet projects and other superfluous initiatives. Not to mention more perks for public sector employees.
Yes, the Federal Reserve has implemented various monetary rules to attempt curtailing inflation. One example being Nominal GDP Targeting, set up in an attempt to narrow the risk of inflationary volatility. However, such a policy does little to improve the overall longitudinal currency debasement that has accumulated over the past five decades. An over 500% loss in purchasing power is a shocking figure to come to terms with. Nominal GDP Targeting only slows down this process, it does not prevent it.
The Consequences of various policy prescriptions oftentimes are cannot be easily predicted. This can alone can explain the enduring influence of F.A. Hayek’s observations regarding the pretense of knowledge. Ironically, one of F.A. Hayek’s admirers and one of the most notable exponents of Austrian economics fell into this very trap. This individual would be former Texas congressman Ron Paul. In a provocative piece published on Alt-M George Selgin describes how Dr. Paul is partly responsible for the exponential growth of the Federal Reserve’s balance sheet.
To any reader familiar with Ron Paul’s policy positions, this charge sounds completely absurd. Arguably Dr. Paul has been more hostile towards the Federal Reserve than any other politician in modern history. How could this longtime critic of the Federal Reserve possibly have emboldened this institution? Most libertarians and conservatives understand that the results of policies that support government intervention can yield unpredictable and lackluster results. Could the same be said for policies that aim to curtail the power of government agencies and firms with contractual obligations to the state? Purportedly the Federal Reserve is a “private company”. Much like another central bank boasting similar claims, this point is debatable considering without the federal government its existence would most likely be a paradox. Even in the arena of curtailing state power good intentions, sometimes do not amount to good results.
Defining the Basic terms
Due to the complex and jargon-heavy nature of monetary economics, it is important to define a few important terms before proceeding.
Ron Paul the Baptist:
Back in 1979, congressman Ron Paul supported a bill that aimed to amended Federal Reserve Act’s section 14(b) that would prohibit the Fed from direct asset purchases from the treasury. This was a privilege that was awarded to the Federal Reserve during World War II to quickly raise emergency wartime funding. This power was renewed in 1947 and 1950 by congress, however, this was never intended to be a permanent privilege. By the late-1970s it became evident that the Fed was engaging in direct assets purchases outside of the context of a war emergency. Dr. Paul vehemently supported H.R. 3404 due to this abuse on the part of the Fed for utilizing this function in the absence of war. He went on to recommend that the Fed could gain greater access to liquid cash through the “ establishment of interest-bearing TT&L accounts”. Thus relinquishing the need for the direct purchase authority. Unfortunately for Paul, the bill failed to pass, however, the direct purchase privilege was not renewed in 1981. At least temporarily Dr. Paul’s appeal for fiscal responsibility won out over the Fed’s tacitly accepted overreach with the direct purchase authority. Limiting the Federal Reserve’s procurement of money to open-market operations which in theory should curtail (to some extent) inordinate money creation.
Paul’s argument in favor of fiscal responsibility unquestionably makes him a Baptist. This normative argument for preserving the financial health of our nation and fighting the ills of institutional abuses. Paul’s advocacy has a populous appeal and while no politician is perfect, at least his intentions were (in this scenario) laudable. The question becomes how did Ron Paul’s praise-worthy policy position result in an inadvertent unholy alliance with the Federal Reserve? Well, it is not quite that linear. It is more of a policy constraint meant to curtail the authority of the Fed ended up aiding them in expanding their balance sheets years down the road. No one could have foreseen this consequence that seemingly would have contained the expansion of their balance sheet.
The Federal Reserve the Unintended Beneficiaries of Paul’s Purposed reform (Our Bootleggers):
The obvious observation that can be made is that the Federal Reserve stands to benefit from being able to easily expand its balance sheet. Making them the Bootleggers. Per Selgin, it was not until October 2008 that the Federal Reserve opted to “pay interest on bank reserves”. Making it fruitful to accumulate “TGA balances”. After the Fed lost the ability to direct purchases from the treasury, they found another loophole that has enabled them to expand their balance sheet to unprecedented levels. While no one directly engineered this loophole, it still was an unpredictable blind spot in the 1979 initiative.